STOCK UPDATE - Bank of Baroda - Sharekhan

Recommendation: Buy
Price target: Rs760
Current market price: Rs679
Price target revised to Rs760
We interacted with the management of Bank of Baroda (BoB) to understand the impact of the weak macro environment on the bank's asset quality as well as the business growth of the bank. The management has guided for slippages of around 1.3-1.4% in FY2012 on the back of conservative lending and strict monitoring of loans.

The credit proposals have declined significantly in the first eight to nine months (FY2012) due to higher interest rates and slower economic growth. The credit (global) is likely to grow at the rate of 19-20% in FY2012 with the overseas book growing at a slightly higher rate. Unlike the other public sector banks (PSBs), BoB's asset quality has remained stable but going ahead the sharp deceleration in the economic growth and sector-specific issues (power, aviation etc) could increase the non-performing assets (NPAs). In addition, the Shunglu Committee's recommendation for restructuring of state electricity board (SEB) loans and speculation of farm debt waiver could stress the valuations of banks.

Therefore, we will downgrade the estimate and valuation multiple of the other PSBs also. We have reduced our earnings estimate for FY2012 by 4% and that for FY2013 by 5% after factoring the higher credit cost. We have also revised our price target downwards to Rs760 (1.1x FY2013 book value [BV]) by reducing the valuation multiple to 1.1x (1.2x earlier). However, post-correction the valuation has turned reasonable and hence we maintain our Buy rating.

Source : Equity Bulls

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